Credit Unions Take Another Look at Car Leasing

For members not looking to be saddled with car loan payments that stretch to infinity, some credit unions are discovering that leasing contracts are meeting their needs and boosting the bottom line.

“(It's) a very popular product in the New York area,” said Nancy Orlando, senior vice president of lending, at the $4.8 billion Teachers Federal Credit Union in Hauppauge, N.Y. “It's a great opportunity to assist in loan growth with good quality loans.”

Since 2007, Teachers FCU has offered a car leasing program through CU Xpress Lease, which provides automotive leasing services to the credit union industry. The cooperative currently has $235 million in car leases in its portfolio, Orlando said. It also funded more than 4,300 leases totaling $133 million in 2013, which was a 244% increase from 2012.

“(We) expect continued strong growth in this segment of our business,” Orlando predicted.

Indeed, more consumers are choosing to lease vehicles, according to data from Experian Automotive. The firm found that 28.4% of all new vehicles financed were leases in the fourth quarter of 2013, up from 24.8% the previous year.

The average amount financed for a new vehicle was $27,430 in Q4 2013, up from $26,691 in Q4 2012, data from Experian Automotive revealed. This marked the highest average loan amount for a new vehicle since 2008 and the first time the amount has exceeded $27,000.

“We are still seeing remarkable stability in the automotive finance industry, even as lenders continue to ease slightly on credit standards to provide loans and leases,” said Melinda Zabritski, senior director of automotive credit for Experian Automotive.

She added, “What makes this good news for consumers is that the more credit-challenged car shoppers who need a vehicle may find that they have more financing options to choose from and can more easily shop around for the best rates and terms.”

When CU Xpress Lease's program debuted in 2007, the company strategically concentrated on building a footprint in the Northeast since it was a very mature lease market, said Robert O’Hara, vice president of strategic alliances at the Hauppauge, N.Y.-based firm, which is a joint venture of privately held GrooveCar Inc. in Hauppauge, and Fusion Auto Finance LLC in Hurst, Texas.

Twelve credit unions ranging in asset size from $45 million to $5 billion have established partnerships with the company since then. The credit union finances the lease, which O’Hara believes produces a higher return on investment than traditional finance loans because the average monthly balance is higher, month-over-month.

“One of the key attractions to credit unions looking to offer leasing is the ability to participate in a market share that represents between 50 and 70% of all new vehicle sales, dependent upon their market,” O’Hara explained. “By offering leasing, they are no longer limited to the small market of consumers within traditional financing.”

O’Hara said other leasing advantages include a “look-to-book ratio” at 85% and the credit quality of potential lessees hovers around 755 depending upon the credit union's underwriting standards.

When the $2 billion NEFCU in Westbury, N.Y., was granted a community charter in 2010, the cooperative kicked its leasing program into high gear, said Chuck Price, assistant vice president/lending manager.

“(It's) an opportunity to generate high-quality, consumer-loan like receivables that helps us grow our member base,” Price suggested. “This is an indirect product that our members would seek through auto dealers, not directly through the credit union.”

Working with CU Xpress Lease, NEFCU has approximately $150 million in vehicles leases on the books, Price said. What has helped grow this segment is what he describes as higher quality borrowers who lower risk and enhance profitability when compared to traditional auto financing. Still, he acknowledged that leases are slightly more labor intensive from the origination and servicing perspectives than a traditional auto loan but they are projected to be an important source of loan balance and related income growth for NEFCU.

“We view the relationship and program as an important piece of our overall business,” Price said. “It affords us the opportunity to expand and diversify our consumer loan portfolio while minimizing risk through originating a significant volume of high-quality relatively small ticket accounts.”

Even though Enterprise Car Sales said it has generated nearly $10 billion in loan volume for more than 1,000 credit unions for more than 30 years, the St. Louis-based company does not have a leasing program targeted at the financial institutions, said Ned Maniscalco, corporate communications manager at Enterprise. However, its Enterprise Fleet Management affiliate leases vehicles primarily to businesses.

Meanwhile, as the nation's economy continues to recover, credit unions may notice more interest in leasing from members with less than stellar credit. Experian Automotive said the average credit score for a new vehicle lease dropped 16 points to 719 in Q4 2013 from 735 the previous year. The average credit score for new vehicle loans, however, saw a slightly smaller decrease year-over-year, dropping from 724 in Q4 2012 to 715 in Q4 2013.

“Our analysis this quarter showed that the average monthly lease payment was $51 lower than the average loan payment, which can make a big difference to consumers trying to stretch their dollar,” said Zabritski.

O’Hara said with the average cost of a new vehicle now more than $32,000, leasing has become a critical finance option for many consumers to even be able to drive a new car. As a result, the demographics for leasing have changed vastly and swiftly throughout the years, he's noticed.

“We have witnessed and it has also been widely reported that Gen Y consumers are not enthusiastic car buyers and are greatly concerned about the cost associated with car ownership,” said O’Hara. “Those concerns have largely held them back from vehicle purchases when other options such as public transportation or products such as ZipCar are available.”

Gen Y consumers might be more inclined to buy cutting-edge technology and greener and more environmentally responsible vehicles, said O’Hara, adding both typically are more expensive than base model trims and are less affordable when financed.

“Leasing is a sustainable product that is a winner for both credit unions and Gen Y consumers. For the credit union, the benefit is to tap into a younger and potentially life-long member,” O’Hara offered.